9320889 Kiefer The operation of markets and the determination of prices are central issues in economics. Efficient operation of capital markets, in particular, is crucial to the efficient allocation of resources. The stock market is key to the allocation of capital in the U.S. and other developed countries. In the U.S. system, the market maker, the specialist assigned to a particular stock or group os stocks, is responsible for maintaining the market in those stocks. The market maker quotes bid and ask prices, and adjusts these in the light of market activity. The market maker accumulates information by watching the order flow. The purpose of this project is to develop and estimate a model of the order flow process and the market makers's behavior using trade by trade data. In particular the information content of trade size will be measured in order to assess the effects of "cream skimming" in financial markets and the interaction between liquidity and information will be examined. ***
